Mortgage backed securities (FNMA 3.000 MBS) gained +33 basis points (BPS) from last Friday's close which caused fixed mortgage rates to move lower compared to the prior week.
Overview: It was all Coronavirus, all the time last week as economists and long bond traders are concerned that 1) this it is not and will not be contained in China and 2) it will disrupt manufacturing in that region for many, many months. This weakened view of global growth is positive for bonds which perform well in low growth environments.
Coronavirus: While numbers to continue to grow in China (and widely believed to be understated), spikes in cases in South Korea, Japan, Italy and Iran as well as other areas have the market concerned that simply locking down the public in a draconian fashion in China is not sufficient to contain this outbreak and the economic headwinds could significantly impact not only China's output but the world's number 3 economy (Japan) as well as other regional manufacturing centers that would serve as a severe supply chain disruption to the United States.
Inflation Nation: January Producer Price Index (PPI), YOY hit 2.1% vs est of 1.6%, Core PPI 1.7% vs est of 1.3%.
The Talking Fed: We will got the Minutes from the last FOMC meeting on Wednesday. You can read their official release here.
Here are some key takeaways from the Minutes:
Manufacturing: The February Philly Fed Manufacturing Survey shot up to one of the highest readings in 10 years with a 36.7 reading vs estimates of 12.0. The regional NY Empire Manufacturing Index was much stronger than expected in February (12.9 vs est of 5.0)
- Federal Reserve officials viewed their current monetary policy as appropriate “for a time” while they remained on guard against domestic and global risks that could slow the longest U.S. expansion on record.
- Economic growth expected to continue at a “moderate pace”
- Easing of trade tensions, receding Brexit risks and stabilizing global growth as reducing downside risks but also generally expected trade uncertainty to remain somewhat elevated
- Participants agree coronavirus warranted close watching
- Participants expected payroll employment to expand at health pace this year; consumption spending would likely remain on a firm footing
- Once reserves reach ample levels, regular open market operations would be required over time to accommodate trend growth in Fed’s liabilities and maintain ample reserves
- Committee should resume before long its discussion of the role that repo operations might play in an ample-reserves regime, including the possible creation of a standing repo facility
- Expressed concern that introducing a symmetric inflation range could be misperceived